Trade finance pertains to all products and instruments offered by banks to facilitate international trade and commerce, from importers and exporters alike. Some important examples of these are documentary credits, documentary collections, and guarantees. In a highly globalized world where businesspeople have more opportunities to connect than ever before, it’s easy to guess there’s a lot of potential in trade financing activities. But in many cases, not enough of that potential is actually being realized. Due to the difficulties applicants experience when filing trade financing requests—and the difficulties banks have in processing them—fewer opportunities for trade actually pull through.
Is there hope yet for global entrepreneurs who want to engage in international trade, as well as banks that want to see greater revenues from offshore activities? The signs point to yes, and much of that promise lies in the digital transformation that the global banking industry is currently going through. It’s up to banks to invest in corporate banking products that will accelerate their capabilities in trade financing and increase their profitability, as well as that of their offshore clients. For those interested in learning more about the topic, here’s a briefer on the modern-day challenges of trade financing and how modern banking technologies work to address them.
Trade Financing in the World Today: A Situationer
Though about 80% to 90% of world trade is dependent on trade financing processes supported by banks, there’s a global trade finance gap of about $1.5 trillion. Moreover, about 45% of all trade financing requests are shot down. Many of those rejected applications come from small-to-medium enterprises (SMEs) and businesses led by people from historically marginalized sectors, like women. These applicants definitely want more opportunities to grow their presence outside of their home country. But they simply aren’t as well-equipped to go through the trade financing application process as their bigger counterparts.
Aside from a general lack of opportunity among fledgling entrepreneurs and a bias towards power players who already have enough financial resources and influence, there’s also the issue of the trade financing application process itself. Applying for trade financing can be extremely cumbersome on the part of new clients. For one, there’s a slew of original documents that they need to compile and reproduce. For another, there are a number of agencies that they will need endorsement from, and no guarantee that they will get this endorsement quickly. Even the rudimentary requirements for starting the application process, like acquiring a bill of lading, may be difficult for applicants in developing countries.
Applicants aren’t the only parties who typically have a tough time with trade financing. When banks don’t have the proper infrastructure to oversee large-scale trade finance, it can be overwhelming for them too. They may be burdened by the complexity and the sheer amount of trade finance data to process, and their current level of technological proficiency and training may be insufficient for processing requests quickly. Banks also have to follow strict compliance mandates from their regulators for know your customer (KYC) and anti-money laundering (AML) for every trade finance request that they receive. Luckily, many banks have seen the merit of overcoming obstacles like these, and have thought of undergoing a digital transformation in order to strengthen their trade financing capabilities.
How Digital Transformation Creates New Opportunities in Trade Financing
Banks have a huge role to play in moving the trade finance life cycle, and they will be able to handle the pressure through the use of technology. Some tasks that a cloud-based trade financing solution will help banks achieve are the following:
- End-to-end support for the bank’s trade financing products and instruments
- Document consistency for all new and existing trade finance applications, for example through the use of automated templates
- Faster and more efficient KYC and AML, like through the use of machine learning (ML) and robotic process automation (RPA) for screening and compliance checking
The digital transformation can help banks re-engineer their trade finance processes to be simpler, easier to engage in, more accessible to partners from across the globe, and—most important of all—inclusive. Technology can ease the burdens on new trade financing applicants, at least from the banking side. International clients can look forward to increased trade financing activities. SMEs and global businesses led by the historically underserved and marginalized can enjoy the speed, efficiency, and ease of doing business thanks to the upgraded trade finance infrastructure. And banks can generate more revenues from global markets, while also establishing themselves as forward-thinking leaders in the global banking industry.
From this survey, readers may be able to pick up on a certain formula for success in trade finance: the smart usage of trade financing technologies, plus enhanced collaboration among banks, customers, and other stakeholders. A digital transformation can definitely change the status quo for the better by decreasing the gaps in trade financing and bolstering healthy, stable levels of economic activity across the globe. The onus then lies on the overseers of trade financing activity—namely, banking institutions—to use what means are available to them and to create the best environment for international trade.